The "Green Shoots" Thing

This morning, on CNBC, BofA CEO Ken Lewis gave an extended interview covering many topics.

Of particular interest was his contention that some sort of economic bottom has been reached, and that we can believe that the recession should be nearing an end.

If only.

This "green shoots" thing has been played up to nauseating levels by CNBC for a month or more. Larry Kudlow openly cried "the recession is over" yesterday.

Am I the only person who feels that Lewis has credibility issues? He's responsible for:

-buying a failed mortgage bank, Countrywide, at an inflated price;
-buying a failed broker, Merrill Lynch, at an inflated price; and
-being strong-armed by the Feds to complete the latter purchase and violate Sarbanes-Oxley, to the detriment of his own shareholders.

So why do we trust the economic judgement of a guy who thought he was getting a great deal on Countrywide, and then was totally blindsided by the financial meltdown?

Further, various economic pundits and administration spokespeople have been on all morning extolling the cessation of increasingly bad sales, unemployment and other economic indicators.

Fine. The pace of the recession's economic deterioration has declined. That is nothing remotely the same as saying we are in a recovery.

What we probably are in is a period of lower economic activity and continuing weakening, at a steady pace, due to the continuing effect of a massive financial deleveraging on top of a normal, but bad, economic recession.

Here's a series of S&P500 Index monthly returns from July 2001- April 2003. The green-highlighted values represent the positive return months which led to the early 2002 feeling of a recovery. The red-highlighted values represent the significantly negative monthly S&P returns following that false spring's 'green shoots' rally.

Jul-01 -0.010
Aug-01 -0.063
Sep-01 -0.081
Oct-01 0.019
Nov-01 0.077
Dec-01 0.009
Jan-02 -0.015
Feb-02 -0.019
Mar-02 0.038
Apr-02 -0.061
May-02 -0.001
Jun-02 -0.071
Jul-02 -0.078
Aug-02 0.007
Sep-02 -0.109
Oct-02 0.088
Nov-02 0.059
Dec-02 -0.059
Jan-03 -0.026
Feb-03 -0.015
Mar-03 0.010
Apr-03 0.081

On April 30th, I wrote in this post,

"Having patiently watched our recent put portfolios steadily decline in value, I reviewed equity market performance in the spring of 2002. By that season, the S&P had posted some good positive monthly returns, along with mild negative returns, resulting in my equity allocation signal indicating a re-entry into long positions. That only lasted for a month, though, as July and September saw the S&P post -8% and -11% returns, respectively.

It was not until spring of the next year that my signals correctly indicated the sustained recovery in the equity market. That spring, 2002 indication was a false positive.

Perhaps this recent 20+% rise in the S&P is another equity market head fake. The 2002 incident was accompanied by a decline in volatility to a point that corroborated a move to long allocations in equities, and puts in options."

It took another six months following September's -11% S&P return for a string of positive returns to signal the genuine end of the market decline.

The recent equity rally has now topped +30% since the March bottom. But based on what?

The retail spending rate of decline easing was primarily in discount stores- Wal-Mart and some drug chains. The Wall Street Journal article discussing the reports noted that mid-priced and high-end retailers are still mired in difficulty.

I just don't buy this cock-eyed optimism suddenly appearing everywhere.